Practice Management
Independent Contractor vs. Employee
We know that with the current economy…you're carefully reviewing every expense and looking for ways to tighten things up wherever possible. When you review payroll and payroll taxes, you may be inclined to shift payroll taxes to your (part time/temporary) workers by designating them as independent contractors. Or they may be classified this way to avoid the extra cost of inclusion in your retirement plan.
Be Careful…The IRS has very specific criteria in determining the status of workers. According to Mike Pivoz, CPA, JD, a local tax accountant… "misclassification can result in significant costs for the practice: repayment of taxes (and interest) that were not paid by the worker, and penalties due to IRS or ERISA violations", as well as the financial and emotional toll of a possible audit.
"To determine whether someone is an employee or an independent contractor, three areas must be reviewed; behavioral control, financial control and the type of relationship between the parties."
Behavioral Control—concerns whether the practice has a right to direct and control how the worker does the task for which the worker is hired.
A worker will be considered an employee if they are told:
- When, where and how to work
- What tools or equipment to use
- Who will assist with their work
- How to perform services in a particular manner
Financial Control—deals with whether the worker has business expenses and investments. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else.
A contractor has:
- Business expenses not paid by the company that hires them
- The ability to incur a profit or loss in their business
- The ability to make their services available to the market
Type of Relationship—reveals whether or not the business provides the worker with employee-type benefits, such as medical insurance, and the permanency of the relationship. Also important is the extent to which services performed by the worker are a key aspect of the regular business of the practice. If a worker provides services that are key to the practice, it is more likely that the employer will have the right to direct and control his or her activities.
The classification as an employee or contractor is shown in:
- Contracts or agreement describing the relationship
- If the worker is given employee-type benefits
The bottom line for dentistry is that assistants and hygienists are usually supervised and directed by the doctors, do not have significant business investments and perform key services for the dental practice. All signs that you are an employer and must comply with the expectations, and expenses, that come with that status.
For more info:
- Visit the IRS web page Independent Contractor (Self-Employed) or Employee?
- Contact Mike Pivoz at 248.642.7803 or mpivoz@mspcpa.com